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How to define standardised derivatives

Sunday 28 March 2010 - by Ed Lakin

 The G20 charged policymakers across the world to reform the derivatives market but there are a few knotty issues still to untie

There have been a lot of column inches devoted to discussing the regulation of standardised over-the-counter derivatives and one issue that is dividing the industry is how to define a standardised derivative.

The issue of standardising over-the-counter derivatives emanates from the G20, which called for standardised OTC derivatives to be traded on exchanges or electronic trading platforms and cleared through central counterparties in its September 2009 Communiqué. Policymakers on both sides of the Atlantic are tackling this work.

The push to standardise is part of a new regulatory framework being created in order to help make the financial services sector more resilient in case of future shocks. There has been acknowledgement that derivatives were not the cause of the financial crisis, but in light of the bankruptcies of Lehman Brothers and the bail out of AIG, both big counterparties – there has been a push to bring transparency and safety to this market, and in particular where these contracts are traded OTC.

However, “standardised derivative” has no clear definition - unsurprisingly given the broad range of derivative instruments available - and instead is best understood by what it helps to achieve.

European Central Counterparty CEO Diana Chan argues that “standardised” is just a label. She says that policy makers are using this phrase to focus on “making as much as transparent and properly risk managed as possible”.



To achieve this, standardisation can take a variety of different forms; contract uniformity standardisation, product uniformity standardisation or process uniformity and automation standardisation.

Contract standardisation formulates itself through legal and confirmation agreements in order to ensure trading terms can be agreed in advance, such as through Master Confirmation Agreements. Product standardisation influences the economic profile of a contract through amending rates, dates or amounts. Process standardisation looks at the automation of processes such as trade capture and straight-through-processing.


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